Educational Articles

Big Oil’s Latest Reserve Replacement Makes for Good Reading

Robert Mitkowski
| March 11, 2014

Drillers are under constant pressure to come up with fresh reserves to replace oil and natural gas currently being produced. The biggest companies in the industry turned in a good performance replacing reserves in 2013.

Imagine a business that has about 15 years worth of natural resource assets at its disposal, but intends to remain a going concern far beyond that time frame, and you get an idea of the challenge facing oil and gas producers with respect to their annual reserve replacement. Companies, such as Dow Jones Industrial components Exxon Mobil (XOM - Free Exxon Mobil Stock Report) and Chevron (CVX - Free Chevron Stock Report), are used to that pressure, although their success in dealing with it varies from year to year. To emphasize the importance of coming up with fresh reserves, companies that persistently fall short on this measure are often forced to look for merger partners, or may feel the need to pursue riskier exploratory ventures.

In 2013, the group consisting of Exxon, Chevron, BP (BP), Royal Dutch Shell (RDSA) and Total (TOT) collectively did well with respect to their oil and gas exploration efforts, although performance was not uniform. BP enjoyed more success than usual, particularly if BP’s Russian interests are included. BP has a unique position in the industry with its near-20% stake in Rosneft, Russia’s largest oil company. All told, BP, with its share of Rosneft included, replaced more than double what it produced in 2013.

Working down the list, Royal Dutch Shell is set to report that it booked a very healthy 131% of its combined 2013 oil and gas production. The company has enjoyed a good deal of success with ventures in the Gulf of Mexico, Malaysia, and Iraq lately. That is important, since it needs to diversify away from Nigeria, where its operations have experienced disruption, owing to sabotage.

Meantime, Total enjoyed a 119% proved reserve replacement rate, based on SEC rules. Like its rivals, the Paris-based company is eager to jump into regions where energy resources are abundant. One of Total’s newest discoveries is in the Kurdistan region of Iraq, while it has acquired interests in fields in Papua New Guinea and offshore Brazil. These efforts highlight the fact that drillers truly need to scour the globe to come up with meaningful discoveries.

As for Exxon Mobil, the industry leader recorded solid, if unspectacular, drilling results in 2013, replacing 103% of its production. While that is not a big number in itself, Exxon shines in other ways, including the sheer size of its replacement volume, at 1.6 billion barrels of oil equivalent. That amounts to more than two million barrels of oil and a like sized energy-equivalent volume of natural gas per day. That is a tall task, especially when it needs to be duplicated year after year, which is just what Exxon has done. In fact, the company has been the model of consistency, fully replacing more than 100% of its annual oil and gas production for the past 20 years. One other item of note regarding Exxon is that its reserve base has shifted a bit more to oil, versus natural gas, as it has pursued domestic natural gas projects less vigorously in the past few years, following a slump in gas prices.

Bringing up the rear among the five big companies mentioned in this research report is Chevron, where reserve replacement came in at 85% which, while below the 100% industry benchmark, is not terrible. Chevron still has a number of projects in the development stage, but some are coming along more slowly, partly as escalating costs mean more capital needs to be allocated. But Chevron’s quiet year aside, the industry’s good recent results in the field provide investors with room for optimism. In particular the Big Oil group contains conservative stocks offering income and good relative safety.

At the time of this article, the author did not have a position in any of the companies mentioned.